The Securities and Exchange Commission (SEC) has upended decades of policy by allowing public companies to include mandatory arbitration clauses in their bylaws—a move investor advocates say will silence shareholders, shield corporate misconduct and likely erode transparency in the capital markets.
The SEC reversed its longstanding opposition to such provisions on September 17, issuing a policy statement that clarified companies can now go public while requiring investors to resolve disputes in private arbitration instead of in court. Supporters inside the agency framed the change as being consistent with federal precedent.
“The law in this area has been clear since at least 2013,” SEC Chairman Paul Atkins said before the SEC vote affirming the new policy. Atkins noted that the Supreme Court and lower federal courts have repeatedly upheld arbitration agreements.
But investor protection attorneys warn the shift will leave retail investors defenseless.
“I think the continued push to keep disputes in arbitration, though good for the Public Investors Advocate Bar Association (PIABA) and its members since arbitration is our sandbox, is bad for America and bad for investors,” said Joe Wojciechowski, managing partner at Stoltmann Law Offices and a PIABA board member. “Without lawsuits being filed in court, open to the scrutiny of the media and supervised by judges, the law stands still. Arbitration removes disputes from that system. That’s how you prevent the law from evolving.”
Adam Gana, managing partner at Gana Weinstein LLP and president of the PIABA, said the decision tilts the scales against ordinary shareholders. “The SEC’s shift to allow mandatory arbitration provisions in IPOs stacks the deck against investors, especially small, retail shareholders,” he said. “Arbitration often means no jury, no consistent procedures, limited appeal, and virtually no public record. The cost isn’t just monetary—it’s loss of transparency, weakened deterrence, and erosion of accountability.”
The strongest criticism from inside the SEC came from agency Commissioner Caroline Crenshaw, who delivered a blistering dissent. “Today the commission finds another way to stack the deck against investors—this time primarily small, retail shareholders in public companies,” she said. Mandatory arbitration, she warned, deprives shareholders of due process, silences collective actions and shields corporate misconduct from public view.
Michael S. Edmiston, a former PIABA president and an attorney with Jonathan W. Evans & Associates, said the change hands corporations a powerful tool to avoid accountability. “Smart drafting of arbitration clauses will effectively eliminate the risk of class action lawsuits for companies,” he said. “It creates a David v. Goliath relationship between the investor and company. Investors will be forced to go it alone against a corporation in a private arbitration forum with no public oversight.”
Edmiston predicted companies will select “the most expensive private arbitration forums so that economics will prevent most investors from being able to afford to bring a claim. The use of such clauses becomes a license to steal as there is no affordable redress for defrauded investors.”
The financial stakes are enormous. In 2024 alone, securities class-action settlements returned $3.7 billion to investors, compared with just $345 million returned through SEC enforcement. Critics argue that removing the private litigation channel leaves an underfunded SEC as the only cop on the beat.
The winners, attorneys say, are corporate issuers and their legal teams, who stand to benefit from fewer class actions, reduced reputational risk, and lower litigation costs. The losers are retail shareholders, who will face expensive, secretive proceedings and the inability to join forces against corporate fraud, they say.
“This is a step backward for the country that is the gold standard of capital formation,” Edmiston said. “Longer term, the lack of transparency and accountability will make American capital markets riskier and less reliable for investors.”
Investor advocates say they plan to fight back. Gana pledged to continue pressing for “investors’ right to meaningful collective action in court, public oversight, and the preservation of precedent so markets remain fair and predictable.” Edmiston added he expects a wave of litigation over the enforceability of arbitration clauses themselves.
For now, though, the commission’s decision stands. “Any conditions of market balance and fairness as those terms relate to investors have been thrown into the ditch,” Wojciechowski said.